Derma Sciences Reports Second Quarter 2012 Financial Results

Derma Sciences Reports Second Quarter 2012 Financial Results

Derma Sciences, Inc. (Nasdaq: DSCI), a medical device and pharmaceutical company focused on advanced wound care, today reported financial and operating results for the three and six months ended June 30, 2012. Highlights of the second quarter of 2012 and recent weeks include:

“We have continued to execute the strategic plan we put in place several years ago and our achievements bring us closer to our transformation into a leading provider of solutions for the growing number of patients afflicted with chronic, non-healing wounds,” said Edward J. Quilty, chief executive officer of Derma Sciences. “We expect that the 54 members of our domestic sales organization will generate a positive return on investment by the end of 2013. Our higher-margin, technologically-innovative advanced wound care products now account for one-third of our net sales, compared with less than one-fourth of net sales at the same time last year, in large part due to the sales force expansion, our growing portfolio of products and the increased utilization of these products by our customers.

“Growth in sales of advanced wound care products has been significant, even excluding the sales derived from MedEfficiency products. Excluding MedEfficiency products, net sales from advanced wound care products were up more than 26% year-over-year and nearly 5% over the first quarter of this year. Net sales of advanced wound care products in the U.S., excluding MedEfficiency products, were up more than 30% year-over-year and nearly 13% over the first quarter of this year.

“During the quarter and in recent weeks we took significant steps to protect and expand our intellectual property. Of key importance, two new U.S. patents on DSC127 were issued, which extend intellectual property protection to 2032 and enhance our flexibility with respect to future marketing plans and potential partnering opportunities. We also recognize the necessity of building and, where possible, strengthening our technology rights. In July we licensed the exclusive global rights to the NIMBUS non-leaching antimicrobial technology used in our BIOGUARD dressings through the life of the patents. These dressings will be particularly important to our sales efforts outside the U.S., where gauze bandages dominate the market.

“We completed the acquisition of MedEfficiency during the second quarter and each of our sales representatives has been fully trained on our total contact casting systems, while the previous MedEfficiency reps have been fully trained on Derma Sciences’ key advanced wound care products. We have made significant progress in understanding the sales cycle of the TCC-EZ and expect to have all our computer systems, supply chain and billing integrated by the end of the third quarter.”

Mr. Quilty added, “We continue to be on track to begin our Phase 3 pivotal trials with DSC127 by the end of this year. We are nearing the end of a year’s worth of work we needed to do in order to prepare for Phase 3, and have made – according to plan – tremendous strides in the manufacturing, clinical and non-clinical portions of the program. Although we have generated excellent growth in our advanced wound care business, should the Phase 3 trials be successful and the drug be approved, this pharmaceutical product, which is directed to a $900 million global market of underserved patients suffering from diabetic foot ulcers, holds the potential to transform Derma Sciences.”

Mr. Quilty added, “Our traditional wound care products continued to contribute positive cash flow during the quarter to help support our advanced wound care efforts. We expect this business to fluctuate from quarter to quarter, although we do expect modest growth for the full year.”

Net sales for the second quarter of 2012 were $17,609,799, compared with $15,879,609 for the second quarter of 2011, an increase of 10.9%. This reflects 52.3% growth in sales of advanced wound care products to $5,800,152 from $3,808,092 in the second quarter of 2011. Second quarter advanced wound care products include $1,474,575 from MedEfficiency, which the Company acquired during the quarter. Excluding sales of MedEfficiency products from both periods, sales of advanced wound care products grew 26.1%. Sales of traditional wound care products were $11,809,647, compared with $12,071,517, a decline of 2.2% reflecting the inconsistency in timing of the distribution businesses and weakness in Canada. For the full year 2012, the Company continues to expect organic advanced wound care product sales growth to be between 30% and 40%, and traditional wound care product sales growth to be between 2% and 4%.

Gross profit for the second quarter of 2012 was $6,198,575, or 35.2% of net sales, up from $4,626,815, or 29.1% of net sales, for the second quarter of 2011. The increase in gross margin reflects increased sales of higher-margin advanced wound care products, which accounted for 32.9% of net sales compared with 24.0% of net sales in the same period last year, and declines in lower-margin traditional wound care sales, partially offset by higher product costs. In addition, sales of MedEfficiency products were largely direct sales at higher margin during the second quarter of 2012, rather than distributed, which also contributed to the margin increase.

Selling, general and administrative expense for the second quarter of 2012 was $9,229,184, compared with $4,945,322 for the second quarter of 2011. The increase was principally due to higher sales and marketing and administrative expenditures associated with advanced wound care growth initiatives. Acquisition-related transaction and integration costs also contributed to the increase.

Research and development expense for the second quarter of 2012 was $1,515,329, compared with $150,566 in the second quarter of 2011, reflecting expenses associated with the preparation for the projected commencement of the DSC127 Phase 3 by year end. The Company continues to expect research and development expense to be approximately $8.0 million to $10.0 million for the full year 2012.

The net loss for the second quarter of 2012 was $2,792,049 or $0.23 per share, compared with a net loss for the second quarter of 2011 of $551,295 or $0.07 per share. Higher compensation and benefit costs, incremental growth-related sales, marketing and administrative costs, higher research and development expenses, and acquisition-related costs net of an acquisition-related $1,887,363 non-cash deferred tax benefit, were principally responsible for the larger net loss.

For the six months ended June 30, 2012, net sales were $32,887,165, compared with $30,250,879 in the prior year six-month period, an increase of 8.7%. The Company reported a net loss of $5,330,950 or $0.46 per share for the six months ended June 30, 2012, compared with a net loss of $1,098,358 or $0.16 per share in the prior-year period.

As of June 30, 2012 Derma Sciences had cash and cash equivalents of $13,599,726 and investments of $5,224,000, which compares with cash and cash equivalents of $17,110,350 and investments of $5,474,000 as of December 31, 2011. During the quarter, the Company raised net proceeds of $17,855,922 in an equity offering and acquired MedEfficiency, Inc. for $14,500,000 in cash. The Company expects transaction and integration costs associated with the acquisition to be approximately $1,200,000, of which $900,879 has been recorded year-to-date.

Derma Sciences management will host a conference call to discuss second quarter financial results and answer questions beginning at 11:00 a.m. Eastern time today. In addition, management will provide a business update and discuss recent and upcoming milestones.

To participate in the conference call, dial (888) 563-6275 (domestic) or (706) 634-7417 (international). All listeners should provide the following passcode: 13987543. Individuals interested in listening to the live conference call via the Internet may do so by logging onto the Company's website, .

Following the end of the conference call, a replay will be available through August 20, 2012 and can be accessed by dialing (855) 859-2056 (domestic) or (404) 537-3406 (international). All listeners should provide the following passcode: 13987543. The webcast will also be available for 30 days.

Derma Sciences is a medical technology company focused on three segments of the wound care marketplace: pharmaceutical wound care products, advanced wound care dressings and traditional dressings. Derma Sciences has successfully completed a Phase 2 clinical trial in diabetic foot ulcer healing with DSC127, an investigational pharmaceutical drug under development for accelerated wound healing and scar reduction, and is preparing to begin Phase 3 clinical trials. Its MEDIHONEY® product is the leading brand of honey-based dressings for the management of wounds and burns. The product has been shown to be effective in a variety of indications, and was the focus of a positive large-scale, randomized controlled trial involving 108 subjects with leg ulcers. Other novel products introduced into the $14 billion global wound care market include XTRASORB® for better management of wound exudate, BIOGUARD® for infection prevention and TCC-EZ™, a gold-standard treatment for diabetic foot ulcers.

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Statements contained in this news release that are not statements of historical fact may be deemed to be forward-looking statements. Without limiting the generality of the foregoing, words such as "may," "will," "expect," "believe," "anticipate," "intend," "could," "estimate" or "continue" are intended to identify forward-looking statements. Readers are cautioned that certain important factors may affect the Company's actual results and could cause such results to differ materially from any forward-looking statements that may be made in this news release or that are otherwise made by or on behalf of the Company. Factors that may affect the Company's results include, but are not limited to, product demand, market acceptance, impact of competitive products and prices, product development, completion of an acquisition, commercialization or technological difficulties, the success or failure of negotiations and trade, legal, social and economic risks. Additional factors that could cause or contribute to differences between the Company's actual results and forward-looking statements include but are not limited to, those discussed in the Company's filings with the U.S. Securities and Exchange Commission.